Intuitive Surgical Snags $430 Million Defense Department Deal

The U.S. Department of Defense (DOD)announced on Monday that Intuitive Surgical beat out 34 companies to be awarded a government contract for the company’s surgical robotic systems, instruments, accessories and upgrades that could be worth as much as $430 million. Called the “da Vinci device,” the surgical robot is Intuitive’s lead product.

Leerink Partners analyst Richard Newitter issued an opinion on Tuesday about Intuitive in the wake of the news, reported Benzinga and MassDevice. He maintained an Outperform rating with a $590 price target for the company, according to Benzinga.

The type of contract awarded to the company, an economic price adjustment, indefinite delivery/indefinite quantity contract, does not guarantee that the government will purchase the amount cited in the contract, but the possibility is there.

“We checked in with management, who noted that although this doesn’t represent a commitment from the government, it greatly simplifies the purchase process should DoD hospitals – where ISRG currently has a limited presence – go forward on buying a [da Vinci] system,” Newitter wrote on Tuesday in a note to investors, according to MassDevice.

If government agencies do take advantage of the newly simplified purchasing process to utilize the entire $430 million allocated, “this revenue does in fact end up being incremental to our current forecasts,” Newitter wrote and could result in “$86 million per year sales upside to our 2015-2017 sales estimates.” The deal could yield approximately $0.50 per year of potential incremental earnings per share, according to Newitter.

The decision to award the contract to Intuitive is interesting in light of the company’s legal troubles. In April 2014, when Intuitive released its 2014 first quarter earnings, it announced a “pre-tax charge of $67 million to reflect estimated costs of settling a number of product liability legal claims against the company.” The claims were related to “alleged complications from surgeries performed with certain versions of Monopolar Curved Scissors (MCS) instruments that were the subject of a recall in 2013 and with a first-generation MCS tip cover that was the subject of a market withdrawal in 2012,” the company said in the statement.

In Intuitive’s 2014 Form 10-K report filed in February 2014 with the U.S. Securities and Exchange Commission (SEC), the company said it was a defendant in approximately “76 individual product liability lawsuits filed in federal and state court and in a class action filed in federal court,” reported the LexisNexis Litigation Newsroom blog. In addition, the company reported in the same filing that it faced a lawsuit by Illinois Union Insurance Co. and Navigators Insurance Co., as well as a shareholder class action lawsuit.

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Last week controversy erupted over the compensation package for Sanofi’s new CEO, Olivier Brandicourt, with several French government officials decrying the amount, calling it "incomprehensible." Brandicourt could walk off with as much as $4.5 million in a “golden handshake” payment in addition to making $4.76 million a year. That base figure is comprised by a fixed annual salary of $1.36 million a year, which is supplemented by a performance-related bonus of between 150 to 250 percent, as well as stock options and performance shares.